Qualcomm (QCOM 2.13%) is often considered a solid investment for long-term investors. It's a leading producer of application processors, integrated GPUs, and baseband modems for mobile devices, and its massive portfolio of wireless patents grants it a cut of every smartphone sold worldwide -- even those that don't use Qualcomm's chips.
Over the past five years, Qualcomm's stock has risen roughly 160% and generated a total return of about 200% after factoring in reinvested dividends. The S&P 500 only generated a total return of 110% during the same period.
But is Qualcomm still a safe stock to buy as the smartphone market matures and the world grapples with an ongoing chip shortage? Let's review the five reasons to buy Qualcomm -- as well as one reason to sell it -- to decide.
1. Market share gains
Back in 2020, the Taiwanese chipmaker MediaTek overtook Qualcomm as the world's leading supplier of mobile system on chips (SoCs), which bundle together CPUs, GPUs, and modems in a single package.
MediaTek gained ground against Qualcomm in the lower-end to mid-range market, and Chinese OEMs placed more orders for MediaTek's SoCs as the trade war limited their access to Qualcomm's Snapdragon SoCs.
However, Qualcomm's market share rebounded and rose seven percentage points year over year to 30% in the fourth quarter of 2021, according to Counterpoint Research, while MediaTek's share fell from 37% to 33%.
2. Weathering the chip shortage
Qualcomm grew its market share because it navigated the global chip shortage more successfully than MediaTek and other small chipmakers.
In its report, Counterpoint said Qualcomm's prioritization of higher-end Snapdragon SoCs, which generate higher profits with less exposure to the chip shortage, enabled it to grow its market share against MediaTek, which struggled with bottlenecks in the lower-end and mid-range markets.
Qualcomm's decision to multi-source key products from its vendors also enabled it to avoid the traffic jams that hurt other fabless chipmakers. During the company's latest conference call, CEO Cristiano Amon said the "high predictability" of its future demand enabled it to "make long-term capacity planning and get long-term capacity commitments from our vendors." Amon said those strategies have put it in "a good position" to navigate the shortage, which he believes will ease in the second half of the year.
3. Stable growth rates
Qualcomm's scale enables it to generate stable and predictable growth. Its adjusted revenue rose 55% to $33.5 billion in fiscal 2021, which ended last September, and analysts anticipate 27% growth in fiscal 2022.
Its adjusted earnings per share (EPS) more than doubled in 2021, and Wall Street expects another 39% earnings growth this year.
4. Shareholder-friendly measures
Last year, Qualcomm returned 74% of its free cash flow (FCF) to its investors through $3 billion in dividends and $3.4 billion in buybacks.
Those shareholder-friendly measures have enabled Qualcomm to pay continuous dividends for nearly two decades. It also retired more than a third of its shares over the past 10 years.
5. A low valuation and a decent dividend
Qualcomm trades at just 14 times forward earnings. By comparison, Intel (INTC -0.99%) -- which is growing at a much slower pace than Qualcomm -- has a forward price-to-earnings ratio of 15. Texas Instruments (TXN 1.11%), which also generates slower growth than Qualcomm with its analog and embedded chips, trades at 21 times forward earnings.
Qualcomm also pays a decent forward dividend yield of 1.9%. That's lower than Intel's 3% yield and TI's 2.5% yield, but Qualcomm has nonetheless generated a higher total return than both chipmakers over the past five years.
The one reason to sell Qualcomm: Slowing smartphone sales
Qualcomm's near-term growth looks solid, but analysts expect its revenue and earnings to grow just 8% and 7%, respectively, in fiscal 2023 as the smartphone upgrade cycle cools off again. Inflation and other macro headwinds could exacerbate that slowdown.
Those concerns have already started rippling through the analyst community. TF International Securities analyst Ming-Chi Kuo recently claimed that several "major Chinese Android brands" had cut their orders by "about 170 million units" (roughly 20% of their original shipment plans) since the start of the year, and that reduction would hurt both MediaTek and Qualcomm. JPMorgan's investment firm also removed Qualcomm and Apple from its bullish "Analyst Focus List" amid concerns about a broader slowdown in consumer spending.
Qualcomm's strengths still outweigh its weaknesses
Those near-term concerns have been weighing down Qualcomm's stock, but I believe they don't erase its long-term strengths. The smartphone market has stalled out several times over the past decade, but Qualcomm endured those cyclical slowdowns and benefited from the subsequent recoveries.
I don't expect the next few years to play out any differently. In addition, Qualcomm has been gradually diversifying its portfolio away from smartphones with new chips for Internet of Things (IoT) devices, connected cars, servers, and even PCs. Those new businesses could eventually make it a better-diversified chipmaker like TI and stabilize its long-term growth.
Simply put, Qualcomm is still a sound investment, and its balance of value and growth make it a compelling investment in this challenging market.